$32 Billion Loss Forces Pemex To Downgrade Offshore Ambitions

The Mexican state-owned oil company is suffering from low oil prices just like every other driller out there, but Pemex has several unique problems that have put it in a worse position relative to many of its peers.

Pemex’s oil production is declining and has been in decline for more than a decade. Output dropped to an average of 2.28 million barrels per day (mb/d) in the fourth quarter, a decline of 3.5 percent from the same period in 2014. That is sharply lower than the nearly 3.5 mb/d Mexico produced a little over a decade ago.

Falling production obviously means the company has seen its revenue stream narrow, a problem that has grown substantially since the collapse in oil prices. Pemex has not turned a profit in nearly four years, and as a result, its debt has mounted, hitting $87 billion at the end of the third quarter.

The Mexican government has ordered the company to trim costs, and so Pemex announced $5.5 billion in cost reductions. The company says it has a “liquidity issue, but not a solvency issue.” That prompted Pemex to announce a headline-grabbing decision to defer long-term offshore drilling. Pemex says that it will delay all plans to drill in deepwater in the Gulf of Mexico while it seeks to shore up its balance sheet. That will save $2.6 billion in the short run. Related: Oil Companies On Edge Ahead Of Super Tuesday

"These adjustments do not weaken Pemex, they strengthen it," José González Anaya said on Monday’s conference call, just a few weeks after becoming the company’s new CEO. The company will also find a few billion dollars’ worth of efficiencies and other cost reductions that were not specified. Last year the company cut 11.5 percent in spending and trimmed its workforce through attrition by not filling 11,000 empty positions.

But the focus on retrenchment in the short-term only means that production will continue to drop from its aging oil fields. Pemex says it’s possible that output could fall by another 100,000 barrels per day this year. “It’s very possible that Pemex’s production will fall this year and, when you go into 2017 after not investing in 2016, declines could snowball and fall more," Pablo Medina, oil and energy analyst at Wood Mackenzie Ltd., told Bloomberg in an interview. Production could even slip to just 2 mb/d next year.

With Pemex unable to finance a lot of deepwater drilling, the much-hyped energy reform pushed by President Enrique Pena Nieto is now more important than ever. Pemex will need to find international partners to share costs. "It doesn’t make much sense for Pemex to go to deepwater alone," Pemex’s Gonzalez Anaya said. "It makes more sense for Pemex to use all the flexibility that the energy reforms provide." Related: Brazilian Oil Giant Petrobras Could Lose Its Most Valuable Assets

He went on to add that although the company is delaying offshore drilling, Pemex still hopes to eventually develop deepwater reserves with the help of private companies. “What we are looking for is to use a new contract or joint venture or another method so that the exploration and production in deepwater that we are deferring, does go online within 10 years, but using a different method,” he said.

Mexico’s President Pena Nieto traveled to Houston for IHS CERAWeek in late February, where he announced that the offshore auction scheduled for this year will go ahead in December. The auction will consist of 10 offers in deepwater Gulf of Mexico, assets that will encompass much more attractive acreage than the shallow water tracts offered in 2015. The December 2016 auction will consist of areas that are situated close to large producing oilfields in American waters.

“Despite the low international oil prices, the world is trusting and investing in Mexico,” Peña Nieto said in Houston. “This is not the time to stop, this is the time to move forward.”